Quick Guide to Product Liability Insurance
Virginia has extensive experience writing about insurance and finance for a number of online platforms. She brings this expertise to business insurance and life insurance content across Fit Small Business.
Product liability insurance covers a business’s financial loss by paying for the business’ legal fees if its product harms a consumer. Policies typically pay for lawyer bills, court awards, and even the injured party’s medical bills if the business is found liable. Product liability insurance costs vary, but premiums generally run between 15 cents and $1.50 per $100 of annual sales revenue. Most small business owners pay around $700 per year.
General liability insurance includes some product liability coverage, but that may not be enough for some small businesses. That makes working with an insurer like The Hartford a good idea. The Hartford’s team of small business insurance specialists can evaluate your risk and point you toward the appropriate coverage for your business.
How Product Liability Insurance Works
Business owners are liable for injury, illness, and property damage caused by the products or services they bring to consumers. In most states, any business in the supply chain can be held responsible for the harm its goods or services cause. That means retailers, designers, wholesalers, manufacturers, and distributors can all be sued for:
- Design defects: When the initial design causes an entire product line to be inherently dangerous, like a top-heavy car that consistently flips over on turns
- Manufacturing flaws: When a flaw in production creates a defect in a product that then causes injury or damage; an example might be a swing set with a loose or weakened chain
- Defective instructions or warnings: When inadequate or unclear instructions cause an injury, such as a cleaning solution that emits chemical fumes and does not give directions to use in a ventilated area
Product liability insurance covers these lawsuits as well as completed business operations that occur off-premises. For example, if a carpenter finishes hanging kitchen cabinets that later fall and cause damage, product liability insurance typically pays for the repairs.
All of these risks are also covered in a portion of general liability called products-completed operations coverage, but a business with greater risk like a manufacturer may need a standalone policy.
Tip: Product liability policies often require the insured to report any potential claim to the insurer within a certain time frame or risk having the claim denied. While a minor incident may not turn into a major lawsuit, reporting them ensures you’ve met your contractual obligation.
Product Liability Insurance Costs
Product liability insurance is usually about 25 cents per $100 in sales revenue. For example, if you sell $1 million worth of goods per year, your product liability insurance costs might be $2,500 (or 0.0025 x $1 million / $100).
Your actual costs, however, depend largely on your industry and the product you bring to consumers. If you’re in a riskier industry like biotech, then you can expect to pay closer to $10,000 per $1 million in sales (or 0.01 x $1 million / $100).
Product Liability Insurance Costs Factors
The cost of product liability insurance varies greatly depending on the risk categorization of your product. These can depend on the size of your product, how it’s marketed, its safety features, and the size of your distribution. Items like fireworks and firearms will have a higher risk factor than fuzzy slippers and yoga mats.
Other factors that determine product liability insurance cost include:
- Industries: Not only are some products riskier than others, but certain industries face high standards and more lawsuits than others, so they often pay higher product liability premiums
- Location: Carriers price insurance based on state insurance regulations and typical loss exposure
- Revenue: Annual revenue defines the overall liability lawsuit exposure a company faces and impacts the amounts awarded by courts
- Claim history: A company or product with a history of claims generally indicates a greater risk for the insurer
- Coverage limits: Policies start with limits as low as $100,000 but can exceed tens of millions of dollars for protection; higher coverage means more exposure for the insurer, so premiums are higher
The Cost of Not Getting Product Liability Insurance
Business owners who need standalone product liability insurance may balk at the extra expense. Before you decide to forgo the coverage, you might want to consider what you could pay if you’re hit with a product liability lawsuit. The most recent data from the Insurance Information Institute shows the average product liability award is $1.5 million.
One way to find affordable product liability insurance is to work with a broker. Online brokers like CoverWallet typically send you offers from multiple carriers via a single application. This makes comparing coverage terms and premiums much easier. Plus, CoverWallet has insurance professionals who can help you evaluate and decide.
Product Liability Coverage Details
Product liability insurance can vary from carrier to carrier. Any business owner considering a standalone product liability policy should get familiar with some of the details listed below to make sure their risks are appropriately covered.
Common Exclusions
Product liability has several exclusions that create reasons for carriers to deny claims or choose not to renew your policy. Five common exclusions specific to product liability insurance include:
- Quality control exclusion: Product liability insurance carriers require that manufacturers and distributors maintain quality control standards to ensure products are safe for consumers
- Reporting exclusion: Failure to report new manufacturing methods, products, materials, or ingredients can mean your policy doesn’t cover your product
- Efficacy exclusion: Your insurer may deny a claim if your product fails to perform its main function
- Material exclusions: Many carriers do not cover certain materials or ingredients; selling or manufacturing a product that contains a forbidden material or ingredient means your policy doesn’t cover it
- Product recalls: Most product liability policies don’t cover costs associated with the withdrawal, inspection, repair, replacement, or loss of use of an insured’s product if it’s recalled
You want to always talk to your carrier when you add products or change production methods, materials, or designs on current products. Doing so can save you a lot of headaches should you be hit with a product liability lawsuit.
Claims-made vs Occurrence Product Liability Insurance
Product liability can be written on a claims-made or an occurrence basis. Claims-made policies only pay if both the triggering event and the claim filing happens while the policy is in force. Most claims-made policies include prior acts coverage for triggering events that occur before the policy starts. Without this coverage, events that cause damage before you buy your policy would be denied, even if you only learn about them during the life of the policy.
The second option is an occurrence policy that pays any covered claim as long as the triggering event occurs during the life of the policy. As a result, occurrence policies tend to be more expensive than claims-made policies because the insurer has to pay claims even after the policy has ended.
Product Recall vs Product Liability Insurance
As we said, recalls are usually excluded from product liability coverage and require product recall insurance. A product recall policy generally covers the business’ financial loss in a recall, such as:
- Reimbursement payments
- Shipping costs
- Product testing
- Customer notification
- Employee overtime
A company working in an industry where product recalls could affect millions of people―safety products, electronics, or food items―should consider getting product recall coverage in addition to product liability insurance.
Vendor Coverage Rider for Retail Product Liability
Instead of buying a standalone product liability policy, retailers may want to ask whether distributors or manufacturers of the products they sell offer vendor coverage. Vendor coverage is an endorsement to the manufacturer’s or distributor’s policy that extends coverage down the supply chain to retail sellers. A retailer who wants to take advantage of this rider should request a certificate of insurance (COI) as proof that the other business owner has product liability insurance. Not all suppliers offer it.
Top Product Liability Insurance Providers
Provider | Best for |
|---|---|
Retailers and other low-risk businesses that want to save money with a policy bundle | |
Young small businesses with new products and no history of liability exposure | |
Retailers and manufacturers of cannabis-based products | |
Businesses looking for product liability and product recall insurance | |
Vendor, exhibitors, and concessionaires who need short-term coverage |
Small business owners with low product liability risk, like many retailers, should look to top insurance providers who offer comprehensive general liability policies and business owner’s policies (BOPs). However, manufacturers and designers may need to work with surplus lines brokers to get a standalone product liability policy, especially if the products they work with pose great risks, such as firearms and consumable goods.
The Hartford
The Hartford is a good fit for small business owners whose risks can be covered sufficiently with the products-completed operations coverage found in a business owner’s policy (BOP). The Hartford’s can be written on a claims-made basis with prior acts endorsements to cover incidents occurring before the policy’s start date while still being some of the most competitively priced BOPs on the market. Its minimum annual premium is $250, or slightly more than $20 per month.
CoverWallet
As an online insurance broker, CoverWallet works with top-rated carriers and is a great fit for new businesses that have no previous product liability exposure. These policies tend to be more expensive, and CoverWallet can shop these policies among multiple top providers to find the best price for new companies that don’t yet have a track record of product sales. Additionally, the company has an easy application that simplifies and speeds up the entire insurance purchasing process.
Insurance Canopy
Insurance Canopy is a specialty insurance provider that can place difficult-to-insure businesses, particularly cannabis industry companies that have significant exposure from the sale or manufacturing or hemp-based and cannabidiol (CBD) items, including ingestible and topical products. Business owners can add product liability riders to policies or purchase standalone policies on a claims-made or occurrence basis.
AIG
AIG is a good choice for businesses that face a high likelihood of product recalls like those involved with child safety products, lithium-ion batteries, auto parts, or vitamin supplements. The company offers product liability and contaminated product insurance as well as a product recall policy that can cover your business’s responsibility to third parties.
Nationwide
Nationwide is a good fit for vendors, concessionaires, and exhibitors who aren’t involved in manufacturing the products it sells. These often have some protection through the product liability insurance found higher up in the supply chain but still need to cover themselves from being attached to lawsuits. Nationwide works with specialty carrier K&K Insurance to bring vendors short-term general liability with product liability coverage that doesn’t limit the number of events you can attend.
Bottom Line
Product liability insurance offers important liability protection if your business manufactures, distributes, sells, or repairs products. Product insurance protects against claims and lawsuits where judgments can be in the millions. Protect your business against the expense of defending claims if a product malfunctions or has a design flaw.
One product liability claim can bankrupt a company that isn’t prepared with product liability insurance. It is easy to get a quote that covers liability before you realized you needed it with The Hartford. Visit The Hartford to see how it can cover your business and get a quote in just 20 minutes.
